As I See It: Rainbow's End

by Victor Rozek

If television advertisers can be believed, retirement will be a time of gracious living. With help from the pharmaceutical industry, the days will be spent frolicking with the grandkids, and the nights will be spent frolicking with the spouse. But for many Americans, the reality will be less idyllic and fraught with problems that are immune to designer drugs. Retirement is a little like death: Though everyone knows it's coming, few are fully prepared for the swiftness of its arrival.

While longevity is largely the outcome of genetics and chance, the quality of post-retirement life is a matter of preparation. Whether we enjoy or endure our leisure years is therefore more dependent on what we do now than on what we plan to do later. The uneasy reality is that most of us aren't doing enough. Less than five percent of working Americans will experience Merrill Lynch-style affluence after leaving the workforce. (And that was true even before Merrill Lynch started defrauding investors by recommending stocks it knew to be worthless.) IRAs and 401(k)s notwithstanding, the vast majority of us will be poorly prepared for retirement and will be forced to make significant lifestyle compromises.

The irony for many people approaching retirement age is that a scant two years ago, things looked pretty rosy. The economy was on a 10-year growth binge, stocks soared like party balloons, and even the stubborn federal budget deficit was finally being reversed. Not surprisingly, during much of the last decade, as the nation's net worth grew, people started buying lots of stuff. How much stuff? Well, as of the third quarter of last year, consumer debt had reached what can only be described as "credit-provider nirvana," cresting at a whopping $7.5 trillion. Everyone was borrowing tons of money, and not one economist in a hundred was warning future retirees about the "wealth effect." But we'll get to that in a minute.

Just when we thought the party would never end, merde, as the French say, happened. The dot-com bubble burst and terrorists attacked. Suddenly, there was a war to finance and fanciful space-based weapons systems to construct, in case we were ever attacked by intercontinental ballistic box cutters. Billions were spent on homeland security; billions more were given away to corporate patrons. The already ailing economy was being further encumbered by massive deficit spending.

Then came the bankruptcies and the revelations. Enron, Global Crossing, and Kmart weren't the only companies to collapse; over 400 corporations have filed for bankruptcy in the last two years. Two million Americans lost their jobs, and a stunning $4 trillion in market value evaporated on Wall Street. The economy, we discovered, was sick in more than the traditional sense: A biopsy of accounting practices showed them to be riddled with cancerous misrepresentation and fraud. The stock market, the substructure of the economy, was groaning under daily revelations that some of its biggest girders had little more than cosmetic substance.

The sum of deficit spending and market disarray can be counted on to cast a pall on the financial prospects of future retirees. Sooner or later working people will have to pay for all of these expenditures, which means some combination of higher taxes and fewer services. Higher taxes will reduce the amount of money people have been available to set aside for retirement. Fewer services means they will have to spend more out of pocket at a time when their income is limited. Issues of critical financial interest to impending retirees--like an overhaul of the health care system--will be postponed due to lack of available funds. The 40 million Americans currently without health insurance will remain uninsured for the foreseeable future. Those fortunate enough to have insurance must cope with annual double-digit premium increases. The surplus, which presented the best chance to save Social Security for the flood of aging boomers, is long gone. How much future retirees can depend on it is anyone's guess. And, finally, the loss of trust in the market has left many middle-aged workers with an investment dilemma: where to invest for the future? As the market declined, stockholders got a rude awakening in their quarterly mutual fund statements: They were no longer as rich as they thought they were. But while much of their paper worth evaporated, their consumer debt did not.

Which brings us to the wealth effect, a bloodless bit of economic jargon that refers to the practice of acting as if you are wealthier than you really are. That's what people tend to do when they look rich on paper. The problem now plaguing many working Americans is that throughout the 1990s their debt load increased while their real income (adjusted for inflation) did not. The result in the last half of the decade is that the debt load for people 50 and older doubled, while the personal savings rate plummeted to zero. That was the average. An AARP study found that "debt burdens were at least twice as great for the bottom income quartile as the top income quartile." The quandary for those approaching retirement age is that all of their discretionary income is apparently being siphoned off to service debt. Little or nothing is being saved for the future.

If the trend is generally discouraging, it is considerably worse if you are a single woman. The Older Women's League reports that 40 percent of all unmarried women age 65 or older rely on Social Security for 90 percent of their household income. These are the people who will have to choose between medication and meals. Women who are among the working poor are likely to remain so because many support children and, on average, make only 73 cents on the dollar, compared with their male counterparts. Then there is the mixed blessing of longevity. Women typically live eight years longer than men. Being alone and facing 15 to 20 years of retirement without assets must be as terrifying an experience as most of us will ever know.

For IT professionals, things are significantly less bleak. Jobs usually pay well and women generally receive equitable compensation. Many companies have generous benefits packages that include some form of retirement savings and medical insurance. But since all of this can disappear in an economic heartbeat, those who remain employed would do well to consider taking a few precautions before leaving the workforce.

First, reduce your debt load. Living with debt severely narrows your available options. If you have a problem with retail therapy, cut up the credit cards. For the average person, assuming an obligation of 21 percent APR on a debt of $10,000 is like volunteering to become an indentured servant. Once indebted, further use of credit, even at modest levels, guarantees that the payments will never cease. It's like carrying a minor mortgage with none of the benefits of appreciation or deduction.

Always pay yourself first. When you sit down each month to pay your bills, consider yourself as just another creditor. Make sure that each month, before you pay everyone else, you pay yourself at least a modest amount, which is allocated directly into savings or investment accounts. Over the years, with the help of compound interest or reinvested dividends, good things will happen.

Pay off your mortgage if you want to keep your house. The sad fact is that private property is a myth. It would be more accurate to say that you rent your home and the land it sits on from the state. Fail to pay your property taxes, and even if you own your home, someone can and will take it away from you. A good many retirees lose their homes because they are unable to keep up the mortgage payments. It's no accident that mobile home parks are full of older people. For most folks, the mortgage is their single biggest monthly expense. Ridding yourself of it means you can get by with much less income. Meanwhile, your house is slowly appreciating, and when you get to the point that you can no longer take care of it, you can sell it, take the one-time federal income tax exemption, and walk away with a substantial amount of cash.

To speed the demise of house payments, select a 15-year, rather than a 30-year, mortgage plan and add a little extra to each monthly payment, which will be applied directly to the principal. Long mortgages are a fool's bargain. Tax advantages notwithstanding, paying 30 years of interest will turn a $100,000 home into a $300,000 ordeal. Real estate, incidentally, is a great investment alternative to the stock market. No matter what the economy does, people have to live someplace, and rental income makes a nice retirement supplement. Plus, you have a tangible asset, which over time is bound to appreciate, rather than a piece of paper whose value, as we have seen, can be manipulated by unscrupulous trustees.

When you reach the age of 50, join AARP. The organization does a superb job advocating for the interests of seniors. It also is able to negotiate many travel, legal, and health care discounts for its members.

Assuming you've invested wisely and are financially prepared for retirement, there is still one thing more that you urgently need: a hobby. There is nothing more forlorn than a bored and restless person skulking around, finding things to complain about, and making everybody around him miserable. If all you have to look forward to at rainbow's end is daytime television, overdose now and save yourself years of slow death by boredom. As Woody Allen once remarked: "It's not that I'm afraid to die. I just don't want to be there when it happens."

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